Measure capacity in units that do not require updating

Why is measuring capacity in dollars problematic?

Two useful definitions of capacity
Design capacity: The maximum output rate or service capacity an operation, process, or
facility is designed for
Actual output
Effective capacity: Design capacity minus allowances such as personal time and maintenance The rate of output actually achieved
Business Inputs Outputs
It cannot exceed effective capacity
Efficiency
Auto manufacturing Labor hours, machine hours Number of cars per shift
Measures
of Steel mill Furnace size Tons of steel per day
capacity
Oil refinery Refinery size Gallons of fuel per day
Number of acres, number of Bushels of grain per acre per year, gallons of
Utilization
Farming
cows milk per day

Number of tables, seating

Restaurant Number of meals served per day
capacity

Theater Number of seats Number of tickets sold per performance

Measured as percentages

Retail sales Square feet of floor space Revenue generated per day
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Design Capacity = 50 trucks per day

Effective Capacity = 40 trucks per day
Actual Output = 36 trucks per day

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1. Estimate future capacity requirements Strategies are typically based on assumptions and
2. Evaluate existing capacity and facilities; identify gaps predictions about:
Long-term demand patterns
3. Identify alternatives for meeting requirements
Technological change
4. Conduct financial analyses Competitor behavior
5. Assess key qualitative issues
6. Select the best alternative for the long term Leading
Build capacity in anticipation of future demand increases
7. Implement alternative chosen
Following
8. Monitor results Build capacity when demand exceeds current capacity
Tracking
Similar to the following strategy, but adds capacity in relatively small
increments to keep pace with increasing demand

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Demand exceeds capacity

Curtail demand by raising prices, scheduling longer lead Things that can be done to enhance capacity management:
times and discouraging marginally profitable production Design flexibility into systems
line Take stages of the life cycle into account Introduction, Growth,
Maturity and Decline
Long-term solution is to increase capacity -
Capacity exceeds demand
Attempt to smooth capacity requirements
Stimulate market price reductions/aggressive marketing Identify the optimal operating level
Product changes Choose a strategy if expansion is involved
Adjusting to seasonal demands
Produce products with complementary demand patterns

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Capacity cushion When to go for it? Calculating processing requirements requires
reasonably accurate demand forecasts, standard
Extra capacity used to offset demand uncertainty processing times, and available work time
Capacity cushion strategy k
Organizations that have greater demand uncertainty typically pi Di
have greater capacity cushions. NR i 1

Organizations that have standard products and services T

generally have smaller capacity cushions. where
NR number of required machines
pi standard processing time for product i
Di demand for product i during the planning horizon
T processing time available during the planning horizon

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Each work area can have its own unique capacity

A department works one 8-hour shift, 250 days a Capacity analysis determines the throughput
year, and has these figures for usage of a machine capacity of workstations in a system
that is currently being considered A bottleneck is a limiting factor or constraint
A bottleneck has the lowest effective capacity in a
system
The time to produce a unit or a specified batch size
is the process time
Working one 8-hour shift 250 days a year provides an annual capacity of 8 ×
250 = 2,000 hours per year.
5,800 hours/ 2,000 hours/machine = 2.90 machines

Consequently, three machines would be needed to handle the required

volume.
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 Bread Fill Toaster
15 sec 20 sec 40 sec Wrap
Order
30 sec
Bread Fill Toaster 37.5 sec

Two identical sandwich lines 15 sec 20 sec 40 sec

Lines have two workers and three operations The two lines are identical, so parallel processing
All completed sandwiches are wrapped can occur
At 40 seconds, the toaster has the longest
First assembly line processing time and is the bottleneck for each
Bread Fill Toaster
line
15 sec/sandwich 20 sec/sandwich 40 sec/sandwich
Wrap/
At 40 seconds for two sandwiches, the
Order
Deliver bottleneck time of the combined lines = 20
30 sec/sandwich
Bread Fill Toaster 37.5 sec/sandwich seconds
15 sec/sandwich 20 sec/sandwich 40 sec/sandwich At 37.5 seconds, wrapping and delivery is the
Second assembly line bottleneck for the entire operation
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What needs to be changed? CORE

What should it be changed to?
DEFINITION
Thinking Processes MEASURES
What actions will cause the change? Throughput The rate at which the system generates money through sales
Investment / All the money that system has invested in purchasing things which
STEP OBJECTIVE
Inventory it intends to sell.
Identify Identify the current constraint (the single part of the process that limits the rate at which
the goal is achieved). Money that is tied up in physical things: product inventory,
machinery and equipment, real estate, etc.
Exploit Make quick improvements to the throughput of the constraint using existing resources
(i.e., make the most of what you have). Operating All the money that the system spends in order to turn inventory into
Expense throughput.
Subordinate Review all other activities in the process to ensure that they are aligned with and truly
support the needs of the constraint. Net Profit
Elevate If the constraint still exists (i.e., it has not moved), consider what further actions can be Return on Investment = Net Profit / Investment
taken to eliminate it from being the constraint. Normally, actions are continued at this step Productivity = Throughput / Operating Expenses
Investment Turns = Throughput / Investment
capital investment may be required.
Generally, management decisions are guided by their effect on achieving the following
Repeat The Five Focusing Steps are a continuous improvement cycle. Therefore, once a constraint improvements
is resolved the next constraint should immediately be addressed. This step is a reminder to
never become complacent Priority 1: Will Throughput be increased?
immediately move on to the next constraint. 5-34
Priority 2: Will Investment be reduced? 5-35
Priority 3: Will Operating Expenses be reduced?
1. Release work orders to the system at the pace of set by
Increased Profit: the primary goal of TOC for most companies
Fast Improvement: a result of focusing all attention on one critical area
Drum
the system constraint
throughput
Buffer inventory required to maintain consistent production at Improved Capacity: optimizing the constraint enables more product to be
constraint manufactured
Rope signal generated by the constraint indicating that some amount Reduced Lead Times: optimizing the constraint results in smoother and
of inventory has been consumed faster product flow
2. Lost time at the bottleneck represents lost capacity for Reduced Inventory: eliminating bottlenecks means there will be less work-
in-process
the whole system keep it busy
3. Increasing the capacity of a non-bottleneck station is a
mirage extra inventory
4. Increasing the capacity of a bottleneck increases the
capacity of the whole system 5-36 5-37

Capacity planning impacts all areas of the organization

It determines the conditions under which operations will have to function
Flexibility allows an organization to be agile

Many organizations utilize capacity cushions to achieve flexibility

Bottleneck management is one way by which organizations can enhance
their effective capacities
Capacity expansion strategies are important organizational considerations
Expand-early strategy
Wait-and-see strategy
Capacity contraction is sometimes necessary
Capacity disposal strategies become important under these
conditions

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